There is often a year-end rally in the financial markets known affectionately as the ‘Santa Rally’. In 2018, the Santa Rally was conspicuous by its absence. Asset values slumped in December, bringing an already difficult year to a fitting close.
TB Wise Multi-Asset Income underperformed both its benchmarks in the month of December as well as for the year as a whole. The fund lost 5.43% in the month, while the Cboe UK All-Companies index was down 3.65% and the IA Flexible sector average was down 4.14%. In 2018, the fund was down 12.03%, while the Cboe index was down 9.83%, and the IA Flexible sector average was down 6.72%.
This week I made a significant further investment into TB Wise Multi-Asset Income, topping up an already substantial holding. The investment was made to take advantage of the value opportunity that has arisen. I thought that fellow investors might be interested in the thinking behind this purchase.
Anyone who follows the financial news will be familiar with the narrative that we are in a mature bull market, after a long period of constantly rising asset prices, which is described as ‘long in the tooth’, and having been sustained mainly by monetary stimulus from central banks, will end as central bankers ‘take the punchbowl away’ by raising interest rates. Our own experience of the past decade has not been of an inexorably rising stock market, but of ever-increasing valuation anomalies, and punctuated by sharp sell-offs in all but the most favoured sectors. There was one such sell-off in 2011, when the Euro appeared to be in jeopardy following the Greek debt default, another in the winter of 2015-6, when the Chinese economy appeared to be slowing rapidly, and yet another in 2018. The result is that today, many of the assets we own in the fund are at or below their prices of a decade, and in some cases two decades ago. Each of these sell-offs was painful, for the managers of the fund as well as its investors (we are both), but in each case, in 2012-3, in 2016-7, as well as in 2009-10 after the Lehman Bros. disaster, the fund bounced back to a new high level.
TB Wise Multi-Asset Income has a flexible, global remit – in other words, we can invest anywhere in the world without restrictions. We chose to invest an increasing proportion of the fund in the UK as 2018 progressed, as the value on offer became increasingly attractive, and in particular in financial and domestic economy-focussed assets, which in many cases have fallen to levels only previously seen in the worst few weeks of the 2007-9 crisis. We may be accused of dozing in front of the Brexit steamroller which is coming along to flatten us, but history shows that asset prices recover long before the crisis that caused them to weaken is resolved. Brexit began with the referendum campaign almost three years ago. We will know the outcome in less than three months. We are nearer the end than the beginning.
Investors appear to be concerned about two mutually exclusive outcomes. On the one hand, there is a growing consensus that global economic growth is cooling. On the other hand, there is concern over rising interest rates. There has been much discussion of ‘policy error’, where central banks continue to raise interest rates long after economic activity has peaked. However, there is little evidence of upwards pressure on interest rates, which are 0.75% in the UK and more or less zero in Europe and Japan. Only in the US have rates been rising, to a current level of 2.25%. However, market expectations of a US rate rise have fallen sharply. In a month, the probability of a rate rise between now and September reflected in the futures market has fallen from 75% to zero. Either economies will weaken, or there will be more interest rate rises – but not both.
The old lesson, that the surest way to accumulate money is by reinvesting dividends, appears to have been forgotten. Twenty years ago, government bonds paid you roughly three times as much income as shares, to compensate for the fact that share dividends rise over time, while bond yields are fixed. In two decades that ratio has been turned on its head, and in the UK you now get three times as much income from the asset that increases its dividends as from the one that pays a fixed coupon.
For all the above reasons, I am comfortable to be adding to my holding in TB Wise Multi-Asset Income at the present time. Whatever happens to prices, the dividend yield on offer is 5.9%.
The writer of this piece, Tony Yarrow is not an authorised adviser, and the piece is not intended as financial or investment advice.